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Antitrust and the Staples-Office Depot Merger

Last month, the Federal Trade Commission went before the U.S.
District Court for the District of Columbia to seek a preliminary
injunction against a merger of Staples and Office Depot, two of the
current three office-supply superstore chains. Once again, the FTC
is apparently trying to prove that it will let no good deed go
unpunished.

A ruling against this merger would set a terrible precedent. For
markets in new technology or new services to develop fully, the
government must allow so-called contestable monopolies. A company
offering a new product or service should never be penalized on the
theory that it may cause a monopoly, as long as there are no
barriers to a competitor entering the market.

No business has a monopoly on the sale of office supplies. In
1986, Staples and Office Depot opened the first office-supply
superstores—a major innovation in what had been a low-volume,
high-margin retail market. In the decade since, these two companies
have each opened about 500 superstores in the United States,
substantially reducing the price of office supplies—especially for
small businesses and home offices.

On Sept. 4, 1996, Staples and Office Depot announced their plan
to merge, and said that the merger would generate economies of
scale and further reductions in the price of office supplies. The
immediate evaluation by the stock market seemed to confirm this
claim: The stock of Office Max, the third office-supply superstore
chain, fell 4.5 percent that day.

The FTC, nevertheless, started an investigation of the proposed
merger. Over the next six months, the commission developed two
types of analysis that led it to conclude that the merger would
probably increase paces.

First, several studies (including one by the Naderite group
Consumer Project on Technology) found that the prices of select
office supplies were lower in markets served by two or three of the
superstores than in markets served by only one.

There are two serious problems with this type of evidence: (1)
These studies did not control for other conditions affecting
prices, like the size of the regional market or the presence of
other discount retailers that sell office supplies. (2) The price
comparisons were a snapshot of price differences at one point in
time. They do not constitute sufficient evidence that the price
differences were sustained over time—an unlikely outcome in a
market with no unusual barriers to entry.

Second, the FTC changed the definition of the relevant market
from the total market for office supplies to the market served only
by the office-supply superstores. Staples and Office Depot together
sell about 75 percent of office supplies sold by superstores, but
only about 5 percent of total office supplies.

The FTC’s restricted definition of the relevant market ignores
reality by assuming that the office-supply superstores face no
effective competition from the many other types of stores and mail
order retailers selling office supplies. In fact, Wal-Mart alone
has about the same revenue from office supplies as would the
proposed merger.

Staples and Office Depot grew and prospered by selling to
price-sensitive customers. It is absurd to assume that these same
customers would ignore the opportunity to purchase office supplies
from outlets other than the superstores. The FTC has been spooked
by a monster of its own creation.

Unfortunately, on the basis of this analysis and with prodding
from the Nader group, the FTC announced on March 10 that it would
seek a preliminary injunction against the merger. The stock of
Office Max increased 2 percent that day, again seeming to
confirm that the proposed merger would have reduced the price of
office supplies.

In a final effort to avoid delay of the merger, and based on a
recommendation by the FTC staff, Staples and Office Depot agreed to
sell 63 of their stores to Office Max (at a bargain price) to
maintain two-superstore competition in markets that, after the
merger, would otherwise have only one superstore. Clearly, if
eventual divestiture would be a feasible remedy to a final ruling
against the merger, a preliminary injunction now is wholly
unnecessary. Both companies have also made a public commitment to
reducing prices after the merger.

But all of this has been to no avail. The parties and the
District Court have been burdened with an unnecessary hearing on
the FTC’s petition for a preliminary injunction. Even if Staples
and Office Depot win in the District Court, the commission will
hold an extended administrative procedure on the merger that could
easily last a year, and the issue will ultimately have to be
resolved again in the courts.

Surely, there must be something more important for the FTC to do
than punish the most aggressive price-cutters in the office-supply
market. Or maybe not. In the latter case, Congress should ask why
the FTC is doing the work of the Antitrust Division of the Justice
Department. Do we really need two antitrust agencies?

William A. Niskanen is chairman of the Cato Institute, which
receives no funds from any of the parties in this case. He is the
former acting chairman of President Ronald Reagan’s Council of
Economic Advisors.